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a) Caitlin's brother-in-law has a 1924 Ford Model T car that is worth $10,000, stored in a barn...

Question:

a) Caitlin's brother-in-law has a 1924 Ford Model T car that is worth $10,000, stored in a barn in Alaska. It increases in value about $1,000 each year as old Fords become rarer. He is willing to sell it to her today, but it will be four years before she has an opportunity to ship it back to Alabama (at that time, shipping will be free, because her sister is moving a truckload of stuff down from their Alaska farm). When Caitlin gets it here, she plans to sell it right away. If Caitlin's discount rate is 10%, what is the most she should pay today for the car?

b) The Lead City factory makes car batteries. The factory opened in 2014, and by the end of the year, they had made 30,000 batteries for a total cost of $2, 500,000. In 2015, they made 40,000 batteries for an additional cost of $200,000. What is the variable cost and fixed cost of all the batteries made in 2014 and 2015?

High-Low Method

The high-low method is used in determining the variable cost and the fixed cost allocated to a mixed cost. The highest activity and the lowest activity are used to determine the variable cost per unit.

Answer and Explanation:

a.) Since the value increase $1,000 every year, the total cost would be:

10,000 + (1,000 * 4) = 14,000

Now get the present value of the cost

PV = 14,000 * 1.10^-4

PV = $ 9,562.19

She should pay $ 9,562.19 today.

b.) In this case, we will use the high-low method.

To get the variable cost per unit,

(2,700,000 - 2,500,000) / (40,000 - 30,000) = 200,000 / 10,000 = $ 20 / unit

So,

2014:

Variable Cost = 20 * 30,000 = 600,000

Fixed Cost = 2,500,000 - 600,000 = 1,900,000

2015:

Variable Cost = 20 * 40,000 = 800,000

Fixed Cost = 2,700,000 - 800,000 = 1,900,000


Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
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